Demystifying Discretionary Indemnity Cover: do you understand the basis on which you are covered?

Insight

Published

31 May 2022

There are two types of indemnity cover for medical practitioners – Discretionary and Contractual. They differ significantly in what they provide and what standard of protection they offer. Therefore knowing exactly what you are covered for, as well as the level of support and protection you will receive when you need it most, offers invaluable peace of mind.

Discretionary Indemnity

Discretionary Indemnity provides no contractual assurance that your provider will indemnify you should a claim be made against you.  Mutual Defence Organisations (MDOs) usually offer discretionary indemnity, which means the choice to accept a claim and support you is completely at their discretion.  There are no specifics stated in the policy wording, as no contract of insurance exists between the medical professional and the MDO.  The decision to cover your defence costs for claims and disciplinary hearings, as well as protect against worldwide Good Samaritan acts and damage to your reputation, is a discretionary one and is only made at the point when you request assistance.

Contractual Indemnity

In contrast, contractual indemnity provides coverage to the full extent of the terms and conditions laid down in the insurance policy provided.  It is a legally-binding contract to provide support and financial assistance in the event of a claim made relating to specific terms, or a  complaint made against you.  Contractual cover is regulated by the Financial Conduct Authority (FCA), which requires insurers to treat all policyholders fairly, to disclose their financial position when required and to hold adequate financial reserves to meet claims. No such regulations exist for discretionary policy providers. Contractual Indemnity underwritten by a medical malpractice insurance company is also backed by the Financial Services Compensation Scheme (FSCS), entitling policyholders to compensation should the insurer be unable to cover the cost of a claim.  Plus, policyholders can access the Financial Ombudsman Service should a dispute arise with their insurer.  None of this is possible under a Discretionary arrangement with an MDO.

 

Why is Discretionary Indemnity still available?

In light of the points set out above, it is reasonable to ask why discretionary indemnity is still available. Organisations that offer discretionary indemnity suggest that this type of arrangement affords them the flexibility to go further than a contract of insurance could and potentially avoid gaps or grey areas within insurance policies.  However, the flexibility that discretion affords can also work against a member, as it did in the recent legal case of Hussain v Medical Defence Union & Anor[1], where a General Surgeon had all legal assistance withdrawn by the MDU mid-claim. The MDU argued that income declarations had been inaccurate during a membership period and as a consequence withdrew support for the claim entirely.

Further, Discretionary Indemnity providers operate outside of the remit of the FCA, the UK regulator.  Ever wondered why your MDOs criteria for determining your annual subscription is so basic compared to that of an Insurance broker?  MDOs cannot underwrite you individually as a risk, as they would be deemed to be carrying out insurance underwriting activity, which is required to be regulated by the FCA.  As a result, the provision of Discretionary Indemnity means the organisation offering such coverage avoids the oversight of the UK regulator and all the costs and red tape that are associated with being a fully regulated firm.

Concerns about the current model of medical indemnity

The widely anticipated Department of Health and Social Care (DHSC) consultation on ‘appropriate clinical negligence cover’ is a reflection of the government’s desire to respond to concerns about the stability of the current model of indemnity.  It seems clear from the DHSC paper that the principal targets for reform are the long-established mutual indemnity providers, the MDU, MPS & MDDUS.  The four main concerns raised by the consultation are:

  1. The indemnity providers who provide cover for many healthcare professionals do so under discretionary indemnity arrangements, meaning they have no contractual obligation to meet the cost of any claim.
  2. Discretionary indemnity providers have no legal obligation to ensure they have the reserves to cover the cost of claims, increasing the risk of a patient ultimately being unable to access appropriate compensation.
  3. Discretionary indemnity providers do not have to disclose their full financial position, meaning that healthcare professionals may be unaware of the extent of their financial cover.
  4. Discretionary Indemnity providers are not subject to regulation on financial conduct and fair treatment of policyholders, leaving healthcare professionals at risk of unfair treatment.

During discussions with the DHSC around the future provision for IBNR claims (potential claim circumstances that have been Incurred, But Not yet Reported, so yet to manifest) for its General Practice members, the MDU admitted “dwindling funds”[2] to cover such future claims.  The MDU had prematurely reduced its fees for its GP members because it believed the state indemnity scheme would pick up historic cases.  GP leaders said that this could be enormously concerning for the 47% of GPs who are MDU members[3] and they were right to raise concerns, as falling outside of the regulatory oversight of the FCA, the MDU is not required to fulfil minimum reserves to pay future claims for any of its members.

Ultimately, the government appears concerned that the market may fail to provide patients with appropriate compensation and leave practitioners liable for the costs of claims and in breach of their statutory obligation to hold adequate cover.

What are contractual indemnity providers doing differently?

The ‘flexibility’ argument for Discretionary Indemnity over Contractual Indemnity is no longer relevant when you review the broad terms being offered by most modern Medical Indemnity Insurance policies.

The litany of regulations that are imposed on regulated insurance companies makes it a legal requirement for them to expressly communicate any exclusions or warranties that appear in a policy wording that might affect the insured’s coverage, or what they would normally expect to be covered for.  Insurance brokers are obligated to prepare quotation packs that adopt a clear format and must communicate clearly to the policyholder all relevant terms and conditions of cover.

The ability for insurance companies to underwrite individually and offer a premium reflective of personal circumstances should be of paramount importance to many medical professionals, particularly those in higher risk specialties.  In 2017 the MDU took the decision to withdraw support for spinal surgeons in private hospitals, which raised a lot of concern among the medical community that the MDU might begin cherry picking low-risk specialities to avoid high claims costs.   The MDU said that the cost of providing indemnity for private spinal surgery was largely driven by the high cost of claims and that this had become “prohibitive”[4].  During the same period, insurance-backed contractual providers continued to underwrite Spinal Surgeons on a case-by-case basis and continued to offer coverage.

Switching from discretionary to contractual indemnity cover

Howden Insurance Brokers offers Contractual Indemnity that can include unlimited retro-active cover where a doctor is switching from a discretionary MDO arrangement. This means a doctor would be covered by the new insurance policy for any claims relating to incidents that occurred while they were a member of the MDO. Further, by switching to an insurance-backed arrangement you can now protect yourself against your MDO exercising its discretion against you and rejecting your claims in the future, even if those claims were incurred while you were a member of an MDO.  In this sense, the Contractual Indemnity policy essentially acts as a safety net against the prospect of future claims not being met by the MDO.  This would grant immediate assurance to any policyholder who has concerns over the stability of the discretionary indemnity model.

Modern contractual indemnity policies also include an automatic entitlement to 21 years run-off cover, meaning full protection against future claims by a regulated insurance policy during retirement. 

In these circumstances it really does beg the question why would medical professionals continue to indemnify themselves via the discretionary model? It is difficult to imagine the same healthcare professionals being comfortable covering their car or home on a discretionary basis and medical indemnity arrangements should be no different.

Don’t compromise on your indemnity – choose a provider that you can rely on. Howden deliver contractual and FCA regulated indemnity, with competitive premiums and fully customisable policies.  By working with a specialist insurance broker that understands the medical profession and remains abreast of the latest challenges that you face, you can be certain that you have the support of an expert team you need should you ever face a claim.

For more information or to contact team, please visit www.howdengroup.co.uk or call 020 4571 7867

Howden Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority in respect of general insurance business. Registered in England and Wales under company registration number 725875. Registered Office: One Creechurch Place, London, EC3A 5AF

 

[1] Casemine.com/judgement/uk/5e37e3ee2c94e04d3064b47b, Jan 30th 2020.

[2] https://www.pulsetoday.co.uk/news/regulation/mdu-admits-dwindling-funds-to-cover-gps-future-claims/, 22 October 2019

[3] Pulsetoday.co.uk, October 2019

[4] British Medical Journal 2017; 357 doi: https://doi.org/10.1136/bmj.j2725 (Published 05 June 2017)